BORIS V. KORNEICHUK
THE TRANSFORMATIONAL MODELS OF CONSUMPTION AND PRODUCTION: TOWARDS AN INSTITUTIONAL MICROECONOMICS

1.1. The transformational factors of consumption

The traditional model of consumption is static by its very nature, because it describes the situation where such important elements of the consumption process as the individual himself, conditions of consumption, etc. remain constant. In other words, the traditional consumption model does not take into account transformational determinants which in our concept include one internal and two external factors.

The internal transformational factor of consumption is connected with individual personality changing in the course of the higher intellectual activity, the latter being treated as “creative consumption”. Therefore, the internal transformational determinant of consumption is designated as creative factor. Note that we use the term “creation” to mean any kind of the higher mental activity of a human being. We consider the creative factor to be the most important of all the transformational factors of consumption as long as introducing this factor in discussion changes the scientific nature of microeconomics fundamentally by making it more humanitarian and less formalized.

The external transformational factors of consumption are connected with the change in the conditions of consumption. We examine two characteristics of consumption which undergo quite frequent changes in modern economic practice but are assumed to be invariable in traditional consumption models. These characteristics are product stock and the nature of a good. The respective transformational factors of consumption are defined as logistic and informational factors. The choice of these terms will be justified later.

Let us consider each of these three transformational factors of consumption separately.

1. The creative factor.

Any consumption theory is based on some subjective conception of human being. The basis of the simple traditional consumption theory is embodied in the “physiological” conception of man. According to it, a person is occupied solely with continuous consumption (eating away) a certain product (kind of food). Such interpretation of consumption is indeed a physiological one, as it describes the situation of ceaseless consumption of a definite product — the situation which is totally implausible for a human being and quite likely for an animal.

Under current conditions, when creative activity of a person plays a major role in economy, one should distinguish between two types of consumption. The first one is a type of static, physiological consumption which is not accompanied by any change in individual personality. This kind of consumption is described by traditional microeconomic models. The second type of consumption is dynamic, creative consumption in the course of which human personality is developing. The creative consumption, in its turn, is divided into creative labor and creative leisure. During the process of the creative labor the individual consumes means of production while during the process of the creative leisure — articles of consumption, but in either case the result of the consumption is human development, personality change.

From the broadest philosophic viewpoint, the meaning and mission of human existence is personal self-development, therefore ideally the individual seeks to minimize the time of physiological activity and maximize the time of creative activity. Under this way of looking one can treat the time of physiological activity as the time when the individual is waiting for the beginning of the properly human, creative activity. The wait comprises the time of sleep, simple labor, illness as well as the time spent in transport, the time wasted while queuing up and the like. The greater is the total wait duration, the less opportunity of self-development has the individual. To put it otherwise, in terms of the traditional consumption theory the wait is a bad.

We use the notion of “wait” to mean any routine (simple, physiological) activity in the course of which individual personality is not developing. Thus, the wait opposes creative activity, or stands for non-consumption. The consumption on the contrary emerges as the creative consumption developing human personality.

Since the wait and the creation are antipodes and the time for creation and wait in sum make up the whole life time of the individual, the creative factor can also be defined as a factor of expectation.

We shall examine three basic ways of formalizing the creative factor when incorporating it into traditional microeconomic models.
The first way consists in replacing the one-argument function of utility by the modified utility function of two arguments — quantity of the good consumed and the duration of the wait forestalling the process of immediate consumption. The first argument of the modified utility function represents the quantity of the good and the second — the quantity of the bad.
The second way consists in expressing total utility as a difference between the utility of the good consumed and the irksomeness (disutility) of the wait endured.

It is appropriate to use the third way in order to modify the worker’s consumption model serving as a basis for constructing an individual’s supply of labor curve. To accommodate this model to the creative factor of consumption it is necessary to give up treating labor as a bad and to consider the labor hours devoted to creative functions as a good. As a quantitative parameter characterizing the effect of the creative factor we use an indicator of richness of labor which numerically is equal to the proportion of the creative labor time in aggregate labor time.

We shall now turn to an examination of the logistic and informational factors of consumption. First of all, note that a contradiction is inherent in the concept of “utility”. On the one hand, this concept describes practical benefit that is being provided in the present and in the future by a given product stock (rational utility). On the other hand, utility delineates the extent of emotional satisfaction that one gets right away after he or she has actually consumed a given amount of the product (emotional utility).

Within the framework of static consumption models the aforementioned duality of the term “utility” does not hinder one from carrying out economic analysis, the latter being of purely abstract nature. While elaborating more realistic dynamic models, however, the distinction between rational and emotional utility makes itself felt. That is why it is necessary to indicate clearly what kind of utility is implied: the utility of a product stock or the utility of actually consumed amount of product. In the first case the transformational factor of consumption assumes a form of the logistic factor while in the second one — a form of the informational factor.

2. The logistic factor.

In static models the individual choice of one or another product stock is speculative and by no means depends on the amount of the product already available. Such interpretation of consumption is quite natural when the consumer makes his/her choice dozens and even hundreds times under the same conditions. With equilibrium product stock (daily, weekly, yearly, etc.) having been established once and for all, the consumer automatically reiterates the same choice over and over again. According to this fact, the initial product stock no longer plays a significant role and one can conditionally presume that in static consumption models the initial product stock coincides with the equilibrium one.

Under dynamic conditions, the individual increasingly often goes from the given product consumption over to consuming other products. Besides, the utility function for a given good can also change with time. Therefore, the static consumption model assumption according to which the individual has practical experience of choosing products under invariable conditions becomes unrealistic. A transformational model of consumption should describe such extreme cases where the individual has just one opportunity to determine equilibrium product stock, with some initial amount of the product being already available.
Now the consumer’s choice comes to making a decision in what direction (increasing or decreasing) and by what amount he or she should change the initial product stock in order to maximize total utility. This problem by its nature belongs to the class of stock management problems, therefore we call the factor under discussion the logistic one (in honor of the applied economic discipline — logistics).

Net utility of a product stock in the logistic model of consumption depends on the initial product stock and is equal to the difference between theoretical utility value and the irksomeness of changing the stock from its initial level to the current (examined) value.
The theoretical utility value amounts to the stock utility in the case where a given stock size is equal to its initial value.
The irksomeness of changing the stock is equal to the utility the individual loses as a result of the stock changing from its initial level to the current one. By its economic nature the irksomeness of changing the stock represents the costs of changing the stock expressed in units of subjective utility. If the pain of changing the stock is infinitely large — i.e. it is actually impossible to change the product stock — the equilibrium stock coincides with its initial size.

3. The informational factor.

In the case when utility is considered as “emotional” utility, the initial amount of product is treated not as a stock but as a total amount of product that has been uninterruptedly consumed for some time period until the “initial” moment.
Such interpretation of the initial amount of the product implies that the amounts of the product which are smaller than the initial size and the amounts of the product which are greater than the initial size are different not only in quantitative terms but are also distinguished by their economic sense. In other words, “emotional” comprehension of utility is connected with certain asymmetry which is not present in “rational” reading.

Let us examine this problem in detail. The fact that the individual has consumed a specific amount of a product means that he or she has experienced consuming every amount of the product which is smaller than the given amount. This statement follows from the traditional model assumption of continuous consumption of the product. Thus, in the initial time moment — that is in the moment when the given amount is wholly consumed — the individual disposes of utility values for any amount of the product which is smaller than the given (initial) amount. In other words, he or she knows the values of his/her utility function for all argument values smaller than the initial amount of the product.

In the extreme case that is of our interest, when our individual consumes the present product for the first time in his/her life, he or she has no experience of consuming the amounts of the product which are greater than the initial amount. To put it otherwise, the individual does not know his/her utility function for those argument values that exceed the initial amount of the product. To find unknown values of his/her utility function the individual has to make some effort, experiencing pain of measuring utility, i.e. losing a certain amount of utility. Therefore we call the factor in question the informational one.

The net utility of the amount of the product consumed in the informational model of consumption depends on the initial amount of the product consumed and is equal to the difference between empirical value of utility and irksomeness of measuring utility.

The empirical value of utility is equal to the utility of the product consumed in the case where by the initial time moment the individual has experienced consuming this amount of the product and knows the appropriate values of utility. For all the amounts which are smaller than the initial level, the utility of the product consumed coincides with its empirical value.

The irksomeness of measuring utility amounts to the utility lost by the individual as a result of making additional efforts necessary for ascertaining the utility of the amount that exceeds the initial level of consumption. For those amounts of the product which are smaller than the initial level the irksomeness of measuring utility is equal to zero. If the irksomeness of measuring utility is infinitely large — i.e. it is actually impossible to find out the utility of the amounts exceeding the initial level — then the equilibrium quantity of the product consumed lies within the limits from zero to the initial level of consumption.